Important legal information about the email you will be sending. By using this service, you agree to input your real email address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an email. All information you provide will be used by Fidelity solely for the purpose of sending the email on your behalf. The subject line of the email you send will be "Fidelity.com: "

Amid questions about how much fuel is left in the booming U.S. economy's tank, investors might want to heed one of the leading indicators of a recession — credit spreads for high-yield bonds.

Bond buyers say the historically narrow gap between yields on below-investment-grade corporate debt and "risk-free" U.S. Treasurys — in other words, investors are demanding less of a premium to hold riskier debt — reflects faith the expansion has room to run.

"The naysayers of this economic expansion don't seem to be reflected in the credit markets," said Jim Sarni, managing principal at Payden & Rygel Investment Management.

Analysts say credit spreads for corporate bonds issued by firms with a credit rating below investment-grade can serve as reliable economic signals. While a rapidly widening spread is viewed as a potential indicator of recession danger, a narrowing spread indicates investors are upbeat about the outlook. Before each of the past three recessions, the high-yield credit spread started to widen, according to ClearBridge Investments.

The bullish growth outlook implied by muted credit spreads runs counter to the view held by Wall Street bears that the economy's second longest expansion since World War II will see its demise sped up by the Federal Reserve's monetary tightening.

Reflecting the benign backdrop, junk bonds have fared well this year. The credit spread, or the extra yield paid by investors to own a basket of high-yield bonds over Treasurys, has narrowed more than 20 basis points to 3.29 percentage points this year, near its tightest level since July 2007, according to the benchmark ICE BAML bond indexes. As prices for high-yield debt rise, their yields fall, tightening the yield gap between them and risk-free Treasurys.

High-yield debt is up 2.3% this year, whereas investment-grade debt, its more creditworthy counterparts, are down 2.4%. The S&P 500 (.SPX) is also up 8.8% this year, nearing its record highs.

Bond buyers have pointed to several signs that the economy's momentum could remain intact. After President Donald Trump enacted the a trillion dollar tax cut at the end of last year, capital expenditures have only started to climb, but remain far below levels expected during the late stages of the economic cycle, said Joe Ramos, head of U.S. fixed income at Lazard Asset Management.

A 'few more years'

"The economy has a few more years before a recession," said Ramos, who also pointed to tepid home building activity and the U.S.'s slow but elongated recovery since the financial crisis. Economists polled by MarketWatch expect housing starts to total 1.27 million, at cyclical highs but well below levels seen before 2008.

According to a poll of bond investors by Bank of America Merrill Lynch, a net 15% said they expected the balance sheets of high-yield issuers to deteriorate over the next six months. Though that share has gradually risen in recent months, the chart below shows fears of weakening credit quality are at levels more associated with an economy recovering from a recession than an economy about to hit the skids.

It's not just growth that's fueling the upturn in high-yield debt. The improving financials of the most indebted corporations also comes on the back of recent tax cuts and a stronger outlook for monetary tightening. The Fed says it plans to raise rates two more times this year, and an additional two times next year.

Tighter credit conditions would hammer companies with excessive debt, but analysts at Bank of America Merrill Lynch said the Fed's transparency over its rate hike trajectory has served as a shot across the bow of corporations who might be tempted to ramp up debt issuance as the economy's prospects improve.

New rules

In addition, new rules that remove tax deductibility from interest payments at the turn of the year have also discouraged corporations from putting more debt onto their balance sheets. Those deleveraging efforts could extend the credit cycle.

"With the next recession two to three years away, higher economic growth and less use of debt — due mainly to this year's sharp increase in the cost of debt relative to equity — corporate leverage should continue to decline," wrote Hans Mikkelsen, a credit strategist at BAML.

As of August, issuance of high-yield corporate paper is down more than 25% year-to-date compared with the same period last year, according to data from Thomson Reuters.

But for some, the very fact that market participants are bullish on the economy is troubling.

That doesn't mean investors will regret piling into high-yield debt when the next recession hits. More economists are leaning toward the view that the terminal rate of the current tightening cycle will be lower than in previous cycles thanks to weaker long-term growth from an aging population and anemic productivity. Lower borrowing costs, in turn, will mean businesses may manage debt-laden balance sheets better compared with previous recessions.

"People too quickly fall for the demise of the cycle; the overall debt levels would be an issue if you think rates would go to cyclical highs. In an aging world, we may very well be stuck with high debt levels to come," said Arvind Rajan, head of global and macro at PGIM Fixed Income.

Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.

Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Long-term-care insurance was supposed to help seniors pay for costly nursing homes and personal aides. Now the industry is imploding. Here's what's at stake for more than 7 million Americans who own the policies.

What Fidelity Offers

Content for this page, unless otherwise indicated with a Fidelity pyramid logo, is published or selected by Fidelity Interactive Content Services LLC ("FICS"), a Fidelity company with main offices in New York, New York. All Web pages that are published by FICS will contain this legend. FICS was established to present users with objective news, information, data and guidance on personal finance topics drawn from a diverse collection of sources including affiliated and non-affiliated financial services publications and FICS-created content. Content selected and published by FICS drawn from affiliated Fidelity companies is labeled as such. FICS selected content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by any Fidelity entity or any third-party. Quotes are delayed unless otherwise noted. FICS is owned by FMR LLC and is an affiliate of Fidelity Brokerage Services LLC. Terms of use for Third-Party Content and Research.

These links are provided by Fidelity Brokerage Services LLC ("FBS") for educational and informational purposes only. FBS is responsible for the information contained in the links. FICS and FBS are separate but affiliated companies and FICS is not involved in the preparation or selection of these links, nor does it explicitly or implicitly endorse or approve information contained in the links.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

Links provided by Fidelity Brokerage Services

These links are provided by Fidelity Brokerage Services LLC ("FBS") for educational and informational purposes only. FBS is responsible for the information contained in the links. FICS and FBS are separate but affiliated companies and FICS is not involved in the preparation or selection of these links, nor does it explicitly or implicitly endorse or approve information contained in the links.

Published by Fidelity Interactive Content Services

Content for this page, unless otherwise indicated with a Fidelity pyramid logo, is published or selected by Fidelity Interactive Content Services LLC ("FICS"), a Fidelity company with main offices in New York, New York. All Web pages that are published by FICS will contain this legend. FICS was established to present users with objective news, information, data and guidance on personal finance topics drawn from a diverse collection of sources including affiliated and non-affiliated financial services publications and FICS-created content. Content selected and published by FICS drawn from affiliated Fidelity companies is labeled as such. FICS selected content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by any Fidelity entity or any third-party. Quotes are delayed unless otherwise noted. FICS is owned by FMR LLC and is an affiliate of Fidelity Brokerage Services LLC. Terms of use for Third-Party Content and Research.